What Is A Demand Curve? (With Definition And Examples)

Companies use various pricing strategies for the goods they manufacture and the services they provide. They use the demand and supply curve to find the correlation between the prices of goods and customer demand. Learning about this curve can help you understand the relationship between price and demand and how businesses leverage it to make informed decisions. In this article, we discuss what a demand curve is, highlight its importance, explore its types and share several factors which cause the curve to shift.

What Is A Demand Curve?

A demand curve shows how prices of goods and services relate to customer demand. The x-axis of the curve represents the quantity demanded over time, and the y-axis represents the price. Businesses use this curve to price their products and services in a way so that they can make substantial profits while keeping the demand high.

Demand is generally low at high prices. As the curve depicting demand moves from left to right, it drops downward, indicating that lower prices result in increased demand. The supply curve shows the relationship between prices of goods and services and the quantity supplied at various points. The point at which the demand and supply curves meet represents the market equilibrium. Price, consumer demand and producers' supply balance at this point.

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Why Is A Demand Curve Important?

Businesses can use this curve when pricing their goods and services. The curve shows points where an increase in price may cause lower demand and vice versa. Companies can view customer demand at each price point, enabling them to set prices to increase their profit while keeping the customer demand high.

The curve also shows whether the demand is elastic or inelastic. For example, if an increase in a product's price causes little or no impact on the demand, the demand is highly inelastic. Businesses can further increase the cost of the product in this case. In contrast, if a slight increase in a product's price causes the demand to decline sharply, the demand is highly elastic. Here, businesses have fewer options to make price changes. They may try other pricing strategies to increase demand.

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Types Of Demand Curves

The two types of curves include:

Elastic

An elastic curve is one where a percentage change in the price causes a significant change in the percentage of quantity demanded. The demand is highly elastic if a particular good or service has many substitutes. Consider the example of high-end cars. If there is a 20% increase in the cost of a high-end vehicle, high-income consumers may stop buying the car and look for other alternatives. Other examples include smartphones, fashion products and luxury items.

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Inelastic

An inelastic curve is one where a percentage change in the price causes a minor change in the percentage of quantity demanded. The demand is highly inelastic if a particular good or service has fewer or no substitutes. For example, a change in the price of salt does not cause a significant percentage change in its demand. Other goods include petrol, medicines and goods produced by monopolies.

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Factors That Influence Demand Curves

Here are some factors that cause the curve to shift left or right:

Income

Variations in income can cause a fluctuation in the curve. This depends on two categories of goods, which are normal and inferior. Normal goods are those whose demand increases with an overall increase in income. Inferior goods are those whose demand decreases with an increase in income. An increase in income allows people to buy more goods, causing the curve to shift towards the right. In contrast, when there is a decrease in income, people may not want to buy a specific good or may find a cheaper replacement. This causes the curve to shift towards the left. For example:

College students may find it challenging to afford to eat at expensive restaurants and choose fast-food joints that are inexpensive. When they get a job, they can afford to eat at upscale restaurants. Here, fast-food joints are an example of inferior goods, whereas upscale restaurants are examples of normal goods.

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Preferences

Preferences or trends result in a shift in the curve. When a new product or service enters the market, its demand increases. This causes the curve to shift to the right. When another distinct product enters the market, the demand for the previous product may decline, causing the curve to move towards the left. This applies to goods such as travel accessories, health and wellness products, smartphones and fashion items. Consider the example:

A company launches a smartphone with a flying drone camera and wireless charging. Its demand increases because of its innovative design and quality. Another company launches a foldable smartphone that supports over-the-air charging and has a voice-controlled camera. With a change in trend, there is a possibility that the demand for the first phone may decline.

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Buyers' expectations

Consumers compare a good's current price with the expected future price when making a purchasing decision. If they believe that the price of a good may increase in the future, they may decide to buy it at the current price. This increases the overall demand for a good, causing the curve to shift right. If they expect the price of a good to reduce over a period, they may decide to buy it later. This causes the curve to shift to the left. For example:

There is news of a worldwide shortage of chips. This causes people to assume that the prices of graphical processing units (GPUs) would increase. This prompts them to buy the GPUs at the current price. A surge in GPU sales increases demand, which shifts the curve to the right. In contrast, there is news that the fuel price would reduce in the coming days. This causes people to wait a few days before buying fuel for their vehicles, resulting in a decline in demand for fuel and the curve shifting left.

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Competitor pricing

Competitor pricing can influence the demand for goods and services in the market. If a competitor can manufacture a good or provide a service at a lower cost while maintaining a decent quality, its demand increases. This causes the curve to shift to the right. Consider the example:

A phone manufacturing company can optimise its production processes, which allows it to manufacture more phones at lower costs. It sells these phones at a much lower price compared to other phones. Because of its credibility and quality, consumers prefer buying this phone over others. This causes an increase in demand for these phones, causing the curve to shift to the right.

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Size and type of population

Usually, an increase in population results in an increase in demand for goods. This causes the curve to shift to the right. For example, if a country's population increases, the need for food products is higher. The composition of the population is also a key factor in deciding demand. It is not easy to provide a general statement on the direction of the curve shift and its magnitude. Consider the example:

A community with relatively more children may experience a demand for daycare centres and baby products. If a community has a higher older population, there is an increase in nursing homes and facilities. Both instances can cause the curve to shift.

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Relation between goods

Two goods can either be substitutes or complements of each other. If a good is a substitute for the other, then a fall in the price of the first good causes a decrease in demand for the other. For instance, tea and coffee are substitutes for one another. If tea prices fall, consumers may prefer it over coffee. This results in a decrease in demand for coffee.

If a good complements the other, then a fall in the price of the first good causes an increase in demand for the other. Consider the example of cars and petrol, which are complementary goods. If car manufacturing companies reduce the price of cars by optimising their production process, more people can afford it. Petrol demand increases as more people can afford cars. The similarity between them determines the magnitude of the shift.